DOC - Physicians Realty Trust's 6% Yield Is A Strong Buy

Summary

• Physicians Realty Trust covers its dividend with funds from operations.
• Demographic tailwinds support the trust’s MOB-focused business.
• Physicians Realty Trust’s dividend yield is compelling and can grow long-term.

Physicians Realty Trust ( DOC ) is a well-managed real estate investment trust with solid prospects for sustained funds from operations growth over the next many years, if not decades.

Physicians Realty Trust is a pure play Medical Office Building healthcare trust that benefits from long-term healthcare industry trends such as an aging population and increased healthcare spending.

The real estate investment trust covers its dividend with earnings and hence has the ability to expand its dividend payout over time.

Portfolio Composition And Favorable Demographic Trends

Physicians Realty Trust is a healthcare real estate investment trust that owns a portfolio of single and multi-tenant physician-leased medical office buildings.

As of September 30, 2022, the trust controlled 290 properties, including 273 medical office buildings. At the conclusion of the third quarter, almost 95% of properties were leased. Two-thirds of the tenants of Physicians Realty Trust are investment-grade.

Physicians Realty Trust operates in 32 states and has a geographically diverse portfolio. CommonSpirit in Nebraska is the largest tenant in the trust's portfolio, accounting for 5.1% of the trust's yearly rental revenue.

The aging of the U.S. population, which is generating a significant increase in healthcare spending, is a key economic driver for Physicians Realty Trust.

Healthcare spending in the United States is predicted to increase by more than 60% over the 2020 level by 2030, which will be highly helpful to healthcare trusts that offer important medical services to a growing older population.

With healthcare expenditure expected to climb significantly through the end of the decade (and most likely beyond), Physicians Realty Trust offers high long-term profits and cash from operations growth potential.

Funds From Operations And Pay-Out Ratio

In my opinion, the trust's reasonable dividend pay-out ratio based on funds from operations speaks volumes for investing in Physicians Realty Trust.

The healthcare trust earned $0.26 per share in the 3Q-22 and $0.79 per share in the first nine months of 2022, while paying out $0.23 per share in 3Q-22 and $0.69 per share from January to September.

Dividend payments suggest an FFO payout ratio of 88% in the third quarter and 87% year to date in 2022. The dividend, in my opinion, is rather solid and has the potential to increase if the real estate investment trust continues to expand its funds from operations.

Releasing Spreads And FFO-Based Valuation

Releasing spreads might increase growth in the trust's funds from operations in 2023. Higher releasing rates (due to limited MOB supply and higher construction/replacement costs) are helping the trust, which means that buildings whose leases expire may be re-rented at a higher rate, supporting Physicians Realty Trust's cash from operations growth.

Physicians Realty Trust has a significant level to pull to raise its core cash flow number, with more leases ending in the next four years (a total of 39.7%).

Given the possibility for lease renewals, higher lease rates, and occupancy increases, I believe it is reasonable to expect the trust's funds from operations to increase by 5-6% in 2023.

Physicians Realty Trust could generate $1.09-$1.11 per share in funds from operations in 2023, implying a P/FFO-ratio of 13.7x, which is not very high for a healthcare trust with a Medical Office portfolio.

Physicians Realty Trust's stock recently traded for more than 17x FFO, therefore when compared to its own valuation history, DOC is selling at a competitive FFO multiple.

Why Physicians Realty Trust Could See A Lower Valuation

Physicians Realty Trust is well-managed and has long-term tailwinds in its industry, but that doesn't mean it can't make mistakes.

A drop in release spreads, future healthcare changes that limit the extent of medical reimbursements, and a rise in the supply of Medical Office Buildings might all put a damper on Physicians Realty Trust's chances for cash from operations growth.

My Conclusion

Physicians Realty Trust, in my opinion, offers a very appealing 6.1% dividend yield that is not only supported by the trust's funds from operations but has the potential to increase over time.

Healthcare spending, which is linked to population aging, is a key driver of company and funds from operations growth.

Even if Physicians Realty Trust's stock isn't completely inexpensive, I believe the price to pay for the trust's dividend stream (13 X FFO) is worthwhile when considering the investment case's long-term nature.

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